How UPA killed engines of economic growth

The growth rate of our economy has declined from around 8 per cent in the mid part of decade to nearly 5.5 per cent and is expected to be less than 5 per cent in this fiscal year. The Government and economists ascribe this to global slowdown as well as delayed decisions in acquiring land and providing clearances for major infrastructural projects. They are right but only to some extent.

The share of service sector in GDP is around 65 per cent. Whenever the term ‘service sector’ is mentioned, the immediate recall is IT and companies like Infosys or Wipro. Factually, all software related activities come under business services, which itself is less than 5 per cent of our National Income. We have mentioned the activities, which constitute the service sector in Table-1. We observe that this sector encompasses diverse activities carried on by large multinationals as well as roadside entrepreneurs. Normally, construction is included in the secondary sector along with manufacturing in developed countries. But given the labour intensive construction and major single house construction by smaller contractors, we have included it in service sector.

We find that the service sector had a share of 60 per cent in 2004-05 which increased to nearly 65 per cent of the GDP and it has grown [CAGR] by 17 per cent during 2004/05 to 2011-12 (current prices) which is higher than that of industry at 15 per cent and overall growth rate of 16 per cent. We find that service sector has larger share as well as greater growth during the last seven years.

See table-2

Table-1

Activities Constituting the Services Sector

1

Construction

2

Trade

3

Hotels and Restaurants

4

Transport, including tourist assistance activities as well as activities of travel agencies and tour operators

5

Storage and communication

6

Banking and insurance

7

Real estate and ownership of dwellings

8

Business services including accounting; software development; data processing services; business and management consultancy; architectural, engineering and other technical consultancy; advertisement and other business services.

9

Public administration and defense

10

Other services including education, medical and health, religious and other community services, legal services, recreation and entertainment services

11

Personal services and activities of extra-territorial organizations and bodies

Note We have considered ‘Construction’ as part of the service sector in our discussion even though sometimes, it is considered as part of the ‘Secondary sector’. See Report of the National Statistical Commission, [NSC] PP 186, Vol II August 2001. Ministry of Statistics and Programme Implementation, New Delhi.

Table- 2

GDP shares and Growth Rates—2004-05 to 2011-12

Sector

Sector Share

Sector Share

Growth Rate[CAGR]

2004-05

2011-12

2004-05 to 2011-12

Agriculture

19

17.5

14.6

Industry

20.3

18.2

14.5

Services

60.7

64.3

16.8

Total

100

100

15.9

Source: Statement 10- NAS- CSO 2013

Among the service sector, we find that 1)construction 2) trade 3)hotels and restaurant 4) Non-Railway transport 5)business services and 6)other services are major components and in each of them non-corporate sectors namely Partnership / Proprietorship and household enterprises dominate. The share of what is called as ‘unorganised’ sectors in these activities is nearly 80 per cent in non-railway transport in 2010-11 and 77 per cent in trade hotels and restaurant. Real estate and business services also have share of more than 65 per cent and it has declined from around 74 per cent in 2004-05. (See table-3)

Table-3

Share of Unorganised Sector in Service activities

Note: Share in respective GDP in current prices

Category

2004-05

2010-11

Construction

63.4

58.6

Trade hotels and restaurants

77.2

76.5

Non-railway transport

76.7

78.8

Real estate, business services

73.6

66.0

Other services

42.9

41.4

Source:Statement 76.1 NAS ;CSO New Delhi

Unorganised sector is essentially part of Small- and Medium-enterprises in manufacturing and services. We find that there is a significant decline in the growth rate [CAGR] of unorganised manufacturing from 10 per cent during 04/05 to 07/08 to 4 per cent in 07/08 to 11/12.

Similar is the case of construction from 11 per cent to 7 per cent trade from 10 per cent to 8 per cent and restaurants from 15 per cent to two per cent. Non-Railway transport fell from 9 to 7 per cent and therefore, the total NDP growth rate fell from 9.4 per cent to 7.4 pre cent respectively. (See table-4)

Actually, the UPA-II has shown substantial deceleration compared to first part which benefitted due to earlier strong growth.

The UPA-II is a decline and deceleration part as far as economic activities go

Table-4

Growth Rate Different service activities

Category

CAGR

CAGR

2004-05 to 2007-08

2007-08 to 2011-12

1

Manufacturing

11.6%

6.0%

Manufacturing – unorganized – non corporate

10.00%

4.00%

2

Construction

10.9%

6.5%

3

Trade Hotels and Restaurant

11.00%

7.60%

Of which trade

10.70%

8.10%

Of which hotels and restaurants

15.00%

2.00%

4

Transport by other means

9.0%

6.8%

5

Real Estate, Ownership of dwellings and Business Services

9.6%

8.5%

6

Other Services

5.6%

6.8%

7

Total NDP [including other Activities]

9.4%

7.4%

Note:computed from NAS; CSO 2012

RBI categorises Data on Bank credit of the ‘unorganised’ sector under household sector. It consists of partnership, proprietorship concerns, joint families, associations, clubs, societies, trusts, groups and individuals for all accounts. Their share of bank credit which was nearly 48 per cent during 2004 when this Government came into power and touched 33 per cent in 2010 showing a consistent decline and a little increase in 2011. However, the share of corporate sector has gone up from around 30 per cent to 49 per cent and the Government from 10 per cent to 20 per cent. [see table-5]

It is interesting that the corporate sector, which has less than 15 per cent of our National Income gobbles up nearly half of the bank credit. Even though the unorganised or non-corporate sector is fastest growing its credit needs are not met by the organised banking sector but by private money lenders etc and the cost of borrowing us as high as 5 to 6 per cent per month-namely around 70 per cent per annum.

In other words, the most productive and growing sectors of our economy are starved of bank credit so that they depend on money lenders and other such sources, including Saradha type enterprises!

We observe from Table-6 that the share of small borrowers has drastically declined. For instance, up to Rs. 10 lakhs category, this amount outstanding to total SCB outstanding has come low on from 32 per cent to 20 per cent — actually from 2000 to 2005, it has shown increase and then shown drastic decline. Same is the case for up to Rs. 1 crore borrowers – from 45 per cent to 32 per cent. We find that there is something which is really problematic in our banking sector, particularly in providing credit to the sections, which not only require them the most, but are also those which are the fastest growing sectors. The performance of UPA-1 and UPA-2 in providing credit through organised banking sector is rather dismal and this has resulted in distortions in our credit markets and slowdown of economic activities where Small- and Medium-enterprises –SMEs are most productive and active.

Table 6

Outstanding Credit of SCBs –Size of loan up to 1 crore

Source: Extracted from table 1.12”Scheduled commercial banks in India from various issues of RBI

Credit Limit Range

Mar 00

Mar 05

Mar 10

Mar 11

Up to 10 lakhsAmount Outstanding [%]

31.7

33

23.4

20.1

Up to 50 LakhsAmount Outstanding [%]

39.9

41.6

32.6

29.0

Up to 1 crore Amount Outstanding [%]

44.6

44.7

35.4

31.7

Source: Extracted from table 1.12”Scheduled commercial banks in India from various issues of RBI

We estimate that more than 70 per cent of retail trade needs are met by money lenders /chits in 2010/11. The crony capitalists who default bank loans get larger share for their wasteful expenditure. Also, our small entrepreneurs get credit from money lenders using gold as collateral. Because of declining credit from bank channels, they have to depend more on gold whose demand have shot up.

An image has been created that FII and FDI are the Anna Lakshmi for us even though in the last decade they have only been around 6 to 8 per cent of our investment needs. Instead of meeting the credit requirements of our kirana stores, we find that our Finance Minister is going around with a begging bowl to New York and Tokyo for FII funds.

Our kiranas and Udupi restaurants and one truck operators and barbers /plumbers/masons and small-time contractors are crying for credit at reasonable rates. But we will not bother about them! They are the real engines of our economic growth. But they are not in the schme of things of our dream team which is imported from phoren countries. The slowdown is directly linked to the choking of these activities. The huge black money generated in our economy used to be partly financing them. Now that has also been dried up since that money is more in to real estate and gold. Bribes to Government and lack of credit are two major problems faced by our SME sector. The solutions are not in New York or Paris but have to be found out from Kottayam to Kohima and Ahmedabad to Agartala about the credit starved productive sectors. We need to understand our reality without the lens of Harvard and Wharton.

The solution is to create a separate body to develop Non-banking Finance Sector [NBFS] and free it from RBI as well as the bureaucratic clutches of the State Governments. RBI hands are full, therefore, no point in complaining that it is not alert about millions of non-bank sources and uses and some time abuses. The NBFS developmental authority should primarily focus on the development of partnership and proprietorship firms in the MSME sector economy by appropriate credit and lesser strangulating regulations.

Will our Mandarins and Minsters who are searching for solutions in salubrious climates abroad shift their focus to India inside?

4 comments

whole statistic is horrorful,,it is indian culture, tradition who are keeping india floating otherwise india would have been sunk ,sold whole gold reserve and land,,,foreign direct investment is very misnomer only 1.83% for 15 years of total investment ,shamefully it is being prpogated by paid media as big like i t,,export,but our labourers,manpower earning more than socalled corporate

Impressive article, with factual backing. Though I appreciate the analysis, I disagree with the conclusion. A govt regulated chit fund operator like KSFE in Kerala is sufficient to cater to some of the needs of SME. We need more funding agencies like them. An extra authority is not going to provide any relief. What we need is a separate department under RBI dealing only with MSMEs. We need the type of NBFCs that can provide cheap loans, but still be able to handle probable NPAs–insurance companies (life and vehicle). But all this needs proper policy framework.

UPA didn’t kill the engines, their petrol tank became empty 5 years ago.